Luzar v. Western Sur. Co.

• Decision Date: 15 November 1984
• Docket Number: No. 15425,15425
• Parties: Jose A. LUZAR and Jose Martin Elexpuree, dba Joe & Martin Trucking, Plaintiffs-Respondents, v. WESTERN SURETY COMPANY, a South Dakota corporation, Defendant-Appellant.
• Court: Idaho Supreme Court

Page 337

692 P.2d 337

107 Idaho 693

Jose A. LUZAR and Jose Martin Elexpuree, dba Joe & Martin Trucking, Plaintiffs-Respondents, v. WESTERN SURETY COMPANY, a South Dakota corporation, Defendant-Appellant.

No. 15425.

Supreme Court of Idaho.

Nov. 15, 1984.

Rehearing Denied Dec. 28, 1984.

Thomas B. High, of Benoit, Alexander & Sinclair, Twin Falls, for defendant-appellant Western Surety Co.

Lloyd J. Webb, of Webb, Burton, Carlson, Pedersen & Paine, Twin Falls, for plaintiffs-respondents.

HUNTLEY, Justice.

We granted a petition to review a decision of the Court of Appeals which reversed a jury verdict in favor of plaintiffs on a cause of action for conversion of personal property which was pledged as collateral. We set aside the decision of the Court of Appeals, 106 Idaho 1, 674 P.2d 430, and affirm the judgment of the trial court.

Plaintiffs Luzar and Elexpuree are partners doing business as Joe & Martin Trucking, who operate as "track buyers", buying, transporting, and reselling hay. In 1975 Joe & Martin Trucking obtained a track buyer's bond, required by a statute, from defendant Western Surety, insuring any claims against Joe & Martin Trucking to a limit of $10,000. Subsequently, Joe & Martin Trucking also obtained Oregon and Washington fuel tax bonds and were required by Western Surety to pledge as collateral $1,500 in certificates of deposit. Approximately 1 and 1/2 years after the initial track buyer's bond was effective, Western Surety notified Joe & Martin Trucking that a $10,000 certificate of deposit must be pledged as collateral on the track buyer's bond as well. Western Surety's agent told Joe & Martin Trucking that "they usually release it (the collateral) after two or three years." Joe & Martin Trucking complied with the demand and delivered to Western Surety the additional $10,000 certificate of deposit. Concurrent with each pledge, the parties executed a security agreement which provided in part:

FIRST: That the Surety shall have the right in its discretion to retain said collateral or the proceeds thereof until the liability of the Surety on account of having executed said bond or any continuance or renewal thereof, or any other or different bond or bonds or undertakings issued for the Depositor, or at his request shall cease and determine.

....

SEVENTH: In case of the termination of the liability of the Surety, without loss or damage or expense as aforesaid, on said bond and any other bond or bonds or undertakings which the Surety may have issued before or after said bond at the request of or on behalf of the Depositor, and competent evidence is furnished by the Depositor to the effect, the said collateral shall be returned thereupon to the Depositor upon the surrender of this instrument properly endorsed by the Depositor to show the receipt of said collateral.

Joe & Martin Trucking obtained substitute bonds on May 7, 1979, with a different insurance company which did not require collateral. On the suggestion of Western Surety's agent, Joe & Martin Trucking did not cancel the Western Surety's track buyer's bond until May 31, 1980, since the premium had already been paid for the year. After cancellation, Joe & Martin Trucking made repeated inquiries to Western Surety's agent and also contacted Western's California office in order to determine how it could obtain release of the collateral. At trial the parties stipulated that on June 6, 1980, Joe & Martin Trucking made a written demand for the return of the collateral:

[O]ffering to display to the defendant that all of the plaintiff's growers-customers had been paid and that the affidavits to that effect from all of the customers with whom the plaintiffs had done business in the last two years could be obtained if the company desired; that there were no claims against the plaintiffs' books available to the defendant for the defendant's study and to determine whether that contention was correct; and further stipulated that on the 9th day of June, 1980, that demand letter was received by the defendant and that on the 17th day of June, 1980, the demand letter was rejected and the company advised counsel for the plaintiffs that it was the company's policy to retain collateral for six months following the termination of the bond.

Before the six months expired, Joe & Martin Trucking sued for conversion of the collateral. At trial, Western Surety relied entirely upon the security agreements as justification for retaining the collateral. Western Surety argued that paragraph "First" of the agreements gives it the right to retain the collateral after cancellation of the bond until the four or five year statute of limitations has run.

At trial, the jury returned a verdict in favor of Joe & Martin Trucking awarding $11,500 for the collateral, $65,000 in general damages, and $11,500 for punitive damages. The trial court also awarded attorney fees pursuant to I.C. § 41-1839. The Court of Appeals reversed the jury verdict on the basis that the collateral agreement clearly gave Western Surety the right to retain the collateral, implicitly finding that the contract terms were not ambiguous as a matter of law. The court remanded with directions to the trial court to grant judgment in favor of Western Surety. This Court granted a petition to review the case.

I

Joe & Martin Trucking argues that the trial court's judgment should be affirmed. Western Surety argues that the jury instructions were improper because the issue of the reasonableness of the retention of certificates of deposit was included therein as an element of conversion; that the construction of the security agreement contract should have been a question for the court and not the jury; and that the terms of the contract entitle appellant to retain the certificates of deposit after cancellation of the bonds.

"Conversion" has been defined as "a distinct act of dominion wrongfully asserted over another's personal property in denial [of] or inconsistent with [the] rights therein." Torix v. Allred, 100 Idaho 905, 910, 606 P.2d 1334, 1339 (1980). A cause of action for conversion is a remedy available to a pledgor against a secured party-pledgee who refuses to return the collateral if a security agreement does not give a legal right to retain the collateral after a demand for return by the pledgor. See Nora v. Safeco Insurance Co., 99 Idaho 60, 577 P.2d 347 (1978); 69 Am.Jur.2d., Secured Transactions § 244 (1973). If at the time the pledgor makes the demand for the return of the collateral, the secured party has a contractual right to continue to retain the collateral, then its refusal to return the collateral would not be an "act of dominion wrongfully asserted." If, however, the pledgor makes a rightful and reasonable demand for return of the collateral, the pledgee must act reasonably in either returning the collateral or in refusing to do so. See Prosser, Law of Torts (1971) at 90. The Second Restatement of Torts, § 222A(2) (1965) cites the following elements for consideration "[I]n determining the seriousness of the interference and the justice of requiring the actor to pay full value ...":

(a) The extent and duration of the actor's exercise of dominion or control;

(b) The actor's intent to assert a right in fact inconsistent with the other's right of control;

(c) The actor's good faith;

(d) The extent and duration of the resulting interference with the other's right of control;

(e) The harm done to the chattel;

(f) The inconvenience and expense caused to the other.

Reasonableness becomes an issue in conversion after demand and notice to pledgee, and pertains, among other things, to the good faith of the pledgee in dealing with the collateral thereafter. Good faith and fair dealing are implied obligations of every contract.

In the case of a pledge, where the secured party takes possession of the collateral, a written security agreement is not required, see I.C. § 28-9-203(1)(a), but a written security agreement, as we have in the present case, will establish the contractual rights and obligations of the parties. Whether conversion exists in the present case depends on the interpretation and legal effect of the security agreement.

Western contends that the written security agreements gave it the legal right to retain the collateral; and that reasonableness or unreasonableness of its retention is not the standard for conversion rendering instructions addressing reasonableness improper.

The agreements in the instant case clearly gave Western Surety "the right in its discretion to retain said collateral." However, that right and discretion exist only "until liability of the surety on account of having executed said bond ... shall cease and determine." This latter statement makes Western Surety's retention rights contingent on its liability on the track buyer's bond, and thereby incorporates by reference all the terms of the bond agreement, including "the provisions of Title 22, ch. 14, Idaho Code." Therefore, in addition to the security agreement, we may look to the terms of the bond and the relevant statutes to determine when liability on the bond "cease[s] and determine[s]."

The bond is required "to secure the faithful performance of his [track buyer's] obligations," including the obligations incurred "under contracts with respective producers or warehousemen of farm products." I.C. § 22-1406. The surety is liable to any "person or warehouseman injured by the breach of any obligation" of the track buyer up to the limits of the bond. I.C § 22-1407. The bond states that cancellation of the bond "shall not affect any liability that shall have accrued under this bond prior to the effective date of cancellation." From these references we conclude as a matter of law that the "liability of the surety [Western] on account of having executed said bond ... cease[s] and determine[s]" at the time when Joe & Martin Trucking has fully performed all its obligations to suppliers and...